Britain, don’t be pessimistic – there are opportunities in the global economy | Gerard Lyons

Too many economists were too optimistic before the financial crisis, and many of the same ones are too pessimistic now

One of Britain’s biggest exports is pessimism. Sometimes we are right to be cautious, given concerns about poverty and housing, but often we are too self-critical. After all, we are still the sixth biggest economy in the world with the sixth largest manufacturing sector and excellence in many areas from pharmaceuticals to aerospace, across the arts and creative industries, and universities through to business, legal, professional and financial services.

Of course, the financial crisis raised valid concerns about whether the banking sector was too big. Having Europe’s financial centre in London came with a heavy price for UK taxpayers, but even here it is encouraging to see the UK take a proactive global role in the post-crisis regulatory environment.

One lesson is the increasing interconnectedness of the world economy. This matters more for the UK than many others given how open our economy is – reflected in trade, investment and migration flows. Hence it is vital for us not to be dragged down by current pessimism, and instead recognise the opportunities out there in the global economy.

There is a danger in economics of what I call a status quo bias, which led too many economists to be too optimistic before the crisis, and in turn leads many of the same ones to be too pessimistic now. They assume the headwinds impacting the global economy will not only blow it off course but damage it permanently. As long as we adapt and change and learn the right lessons from the crisis this need not be so.

Post-crisis it has been a divided world economy. The east has grown at a much faster pace than the west. Now, it is more complex. Many emerging economies such as India or Brazil are at the stage of the economic cycle where they need to slow, to counter inflation or trade problems. In addition, China is engineering a move to a slower, more sustainable pace of growth.

Yet, any slowdown across emerging economies should not disguise the underlying positive longer-term factors that will drive future global growth. These include urbanisation, the increasing scale of the middle class, and rising trade, as new trade corridors blossom between more countries. The best way to think of it is that for China and emerging economies the trend is clearly up but there will be setbacks along the way.

In this environment, how will the west do? Well it is not just a case of selling more into such markets, although that is an opportunity. The west needs a sustained recovery in domestic demand.

A couple of noticeable changes happened in the UK in recent years. One was that unemployment did not rise as much as feared. Instead, wages were squeezed as firms held on to staff. It was still tough, with many in part-time work or on zero-hours contracts, while the number of under-25s who are not in employment, education or training is close to 1 million. This squeeze on wages was compounded by other factors.

In the past when the US and UK were in recession oil prices would be low, easing the adjustment. Not this time. The growth of China and others led to food and energy prices remaining stubbornly high. This helps explain the cost-of-living squeeze. Now, as inflation eases and wages rise, the UK economy is likely to see stronger growth. But there is much catching up to do, and as output rises this should make inroads into our low productivity, which is one of the biggest economic challenges.

We will need to compete on price and quality. Although some firms may “reshore” as costs rise elsewhere, increasingly we will need to focus more on quality as our differentiator.

That presents challenges and opportunities. Switzerland tops the World Economic Forum’s annual global competitiveness table despite having an expensive currency.

So it can be done. It will mean the UK needs to spend more on its infrastructure, invest and innovate, playing to our creative strengths. Despite short-term challenges the longer-term outlook is positive.

Gerard Lyons, economic adviser to the mayor of London, will deliver the 2014 Peston lecture on Tuesday 11 March at 6.30pm